Dear Friend,

Ministry of Corporate Affairs is considering to frame New Rules in respect of unlisted public companies (Preferential allotment) Rules 2003 by replacing it with/private placement it with Unlisted Public Companies (Preferential Allotment) Rules, 2011 which requires more disclosures and keeping the securities in Demat Form. It had invited comments/ suggestions on it. As a professional I had gone through it and had found certain issues which Ministry shall consider while finalizing the new rules. I am forwarding my views before u with anticipation to know your view so that I can incorporate them and forward them to the Ministry.

NEW RULES / SUGGESTIONS
DRAFT NOTIFICATION
GSRNew Delhi .5.2011
In exercise of the powers conferred by sub Section (1-A) of Section 81 of the Companies Act 1956 read with Section 642 of the said Act, the Central Government hereby makes the following rules in supersession of unlisted Public companies (Preferential Allotment) Rules, 2003.
1.Short Title and Commencement
(i) These rules may be called Unlisted Public Companies (Preferential Allotment and Private Placement) Rules 2011
(ii) They shall come into force on the date of their publication on official Gazette.
2.Applicability
These rules shall be applicable to all unlisted public companies in respect of preferential issue of equity shares, fully convertible debentures, partly convertible debentures or any other financial instrument which would be convertible into or exchanged with equity shares at a later date.
3.Definition
(1) “Preferential Allotment” includes issue of shares on preferential basis and or through private placement made by a company in pursuance of a resolution passed under sub-section (IA) of Section 81 of the Companies Act, 1956 and issue of shares to the promoters and their relatives either in public issue or otherwise.
(2) “Promoter means
(a)the person who are in over-all control of the company: and
(b)the person or persons who hold themselves as promoters.
Explanation:Where a promoter of a company is a body corporate, the promoters of that body corporate shall also be deemed to he promoters of the company.
(3) “control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. / No Comment
4.Special Resolution
(i) No issue of shares on a preferential basis can be, made by a company unless authorized by its articles of association and unless a special resolution is passed by the members in a General Meeting authorizingthe Board of Directors to issue the same. The Special resolution shall be acted upon within a period of 12 months.
(ii) The issuer company making an offer of securities shall make the disclosures in the offer documents as given in Annexure-I to this Rule.
(iii) The offer document as stated in sub-pars (ii) above shall be approved by the members in General Meetings by way of special resolution.
(iv) The copy of special resolution passed in the General Meeting for issue of private placement alongwith copy of offer document shall be filed with the ROC as required under section 192(4) of the Act. / Rule 4 on Special Resolution, looks to be having no problem except that the disclosures need to be modified/deleted as per the suggested lines, if accepted. Further, it looks to be overriding to the Schedule II of the Companies Act, 1956 which will render it ultra virus.
5.Pricing
Where warrants are issued on a preferential basis with an option to apply for and get the shares allotted, the issuing company shall determine before hand the price of the resultant shares. / Rule 5 looks to be OK
6.Other conditions for the issue of private placement
(i) There should not be a gap of more than 30 days between the opening and closing of issue of private placement.
(ii) There should be a minimum gap of period of 60 days between two issues i.e., closing of one issue and opening of another issue.
(iii) For any issue of debentures, convertible debentures or any other financial instruments which would be convertible into or exchanged with equity shares at a later date under private placement which may result into cumulative amount of Rs. 5 crores or more, a company has to seek prior approval of Central Government in the prescribed e-form (as given in Annexure-II).(e-form is to he developed).
However, no approval of Central Government is required for issue of equity shares under private placement.
(iv) After every issue of security under private placement, the company shall tile with the Registrar of Companies a return of allotment within 30 days of the allotment in the prescribed e-form duly verified by the practicing professional (as given in Annexure-III)(e-form is to he developed). / Rule 6 needs to be re-looked from investors perspective, after all the Regulations are meant to help the investors who are public at large and these rules have been framed to protect their interest. The basic nature and necessity to resort to Private Placement as provided in Sec.67(3) of the Companies Act, with or without provisos, is to tap the money for projects from the willing class of persons who wish to invest with the hope to get some return against such investment at the time of their need but who either have no access or are not willing to enter in the capital market for trading of securities.
Proposed sub-rule (i) and (ii) should be modified. Opening and closing dated of issues of securities on Private Placement basis if kept too short proposed in the draft, it is not possible for small investors to come together. Therefore, instead of restricting the period of opening and closing dates, provision should be made to link the period with the project start and completion so that all stake holders are benefited and the regulator also can monitor it. This will make sub-rule (ii) meaningful, else this may look nice on face but practically neither it will benefit the company nor the investors.
Sub-rule (iii) is not in conformity with the liberalization policy vis-à-vis cohesion with the true objective of private placement for the projects. After liberalization the projects run into billions and are prone to stiff competition. If the project running companies are made to run pillar to post for small amounts like Rs.5 crores as suggested in the draft Rules, interest of the projects shall jeopardize and it will ultimately be the loss to the investors. Therefore, while framing the rules the Ministry must keep in mind the rural India also. The provisions of Sec.60B of the Companies Act 1956 are self sufficient for this purpose and the Rules must be framed in line with those provisions.
7.Dematerialization of the Securities
All securities issued under preferential allotment or private placement shall be kept in Dematerialized form as required under Depositories Act, 1996 / Proposed Rule 7 makes all securities issued under preferential allotment or private placement to be kept in Dematerialized form. In the situation when even the instruments of listed securities are liable to be rematerialized at the instance of investor, it may amount to hardship to implement. Further, it is not in conformity with the provisions of Depositories Act 1996.
It is not only the company to keep the securities in dematerialized form, the investor also must have the DP ID, then only he/she can subscribe. This provision will deprive the rural folk as our infrastructure has not reached at each and every corner of the country.
Therefore, the Rule must have the scope for keeping the securities in physical form also.
8.Compliance Certificate
Every company having made private placement or preferential allotment under these rules shall file a compliance certificate by practicing Chartered Accountant/ Company Secretary/ Cost Accountant with the office of Registrar along with return of allotment which will certify that preferential allotment/ private placement made is in accordance with these rules. / No Comment

Further, while finalizing these Rules, the Ministry must first keep in mind the true intent of the provisions of Sec.55A read with Sec.60B and other applicable provisions of the Companies Act 1956 including Schedules.

Private placement route is adopted by closely held companies who do not intend to go for listing for various reasons, like their size, market spread, capacity to tap up money and more so entry in risk due to market fluctuations of their securities.

For listed and intending to be listed companies who wish to have their presence in open market, there are separate provisions framed under SEBI Act, SEBI (ICDR) Regulations, etc. For unlisted companies the Ministry must follow provisions of Companies Act 1956 and Rules frame thereunder without mixing with the open market provisions.

It is also pertinent to note that the Unlisted companies under private placement cannot solicit subscription by advertisement but they have to reach to the investors through personal contacts to the selected mass. Therefore, howsoever large the number may be, there is no generality to denote the nature to be public.

It must also be kept in mind that the money saved by way of simpler provisions will help the company to sustain and grow and in long run to contribute to the economy of Nation, else, these will be strangulated howsoever big they may have emerged with time.

.Kindly send your suggestion with the returning mail so that I can include the same in the letter to the Ministry on behalf of professionals

Annexure-1

DISCLOSURES IN THE OFFER DOCUMENT PURSUANT TORULE 4(11) OF THE RULE

The following disclosures are mandatory to be make in addition to other disclosures, if any, company wishes to make in the offer document :

  1. Name of issuer alongwith date and place of incorporation, address of registered office, telephone number, fax number and name of contract person, website address and e-mail address.
  2. Whether there has been any change in registered office address, if yes, the old address within 5 yeas may be stated.
  3. Name of promotes and Directors of the issuer company alongwith complete addresses.
  4. Nature number, price and amount of specified securities offer and size of the total issue.
  5. Aggregate amount proposed to be raised through all the stages of offers made through offer documents.
  6. Date of the opening of offer.
  7. Date of closing of issue. in no case there should be a gap of more than 30 days from the opening of such issue.
  8. Date of earliest closing of issue, if any.
  9. The object of the issue and brief detail of project, if any for which issue is made.
  10. Details of statutory clearances needed for the project and the status of such clearances.
  11. Details of outstanding loans and advances.
  12. Names of loss making group companies.
  13. Any investment in debt instruments which are unsecured or which carry interest rate lower than the market rate.
  14. Negative cash flow, if any.
  15. Amount of contested tax demands.
  16. Authorized, issued, subscribed and paid up share capital, alongwith number of securities, description and aggregate nominal value.
  17. Size of the present offer and proposed contribution of promoters, if any.
  18. Paid up capital (i) after the offer (ii) After conversion of convertible instrument (if applicable).
  19. Share premium account (before and after issue)
  20. Disclosure to the effect that all securities offered through the issue shall be made fully paid up or may be thrfeited for non payment of calls within 12 months from the date of allotment.
  21. If the offer relates to issue of convertible/non convertible debentures or other financial instrument, the complete details or nature of security, interest rates and terms of repayment etc may be furnished.
  22. If offer is for equity shares, whether any dividends are assured.
  23. Brief details of the project for which issue is made and project appraisal conducted whether any weakness has been pointed out in appraisal report.
  24. Schedule for implementation of project for which issue is made.
  25. Earning per share and diluted earning per share pre issue for the last 03 years.
  26. Average return on net worth in last 03 years.
  27. Netassets value per share based on the last Balance Sheet.
  28. Net assets value per share after offer.

29. Outstanding litigations involving issuer which if decided shall have material impact on the financial health of the company.

  1. Class or class of person to whom allotment is proposed to be made.
  2. Intention of promoters/ Directors/ Key management persons to subscribe to offer.
  3. Shareholder pattern of promoters and other class of shares before and after the offer.